31 minutes | Aug 10th 2020

#056 | Paying off your mortgage is a great investment

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We dive deep into the mechanics of mortgages and explain some of the misconceptions about them, while also promoting the benefits of paying down that debt.

  1. How mortgages work.
    1. You put some money down to demonstrate skin in the game and lower risk for a bank.
    2. Bank lends you money over 15, 20 or 30 years
    3. You pay back some of the equity, called principal payment, and then interest.
    4. You have a schedule of payments; first payment is high interest, low principal. Over time that flips.
      1. $300,000 house, $60,000 down, so a $240,000 mortgage. At 4% interest, your payment will be $1,181. At first interest is $828 of that, principal is the rest. But interest decreases as your balance decreases. So more is just “savings” as principal.
  2. Why mortgages are good
    1. It’s a lifestyle choice. It allows you to live in the place you want and provide the life you want for you and your family. 
    2. It’s yours. You make decisions, you decorate it and modify to make yourself happy.
    3. It can appreciate in value.
  3. Why mortgages are bad
    1. You pay interest. There’s a cost!
    2. But what about tax deductions? Only above the standard deduction of $24,800, otherwise the government is just giving it to you anyway. Don’t get lulled into the belief that because you *might* be able to get a deduction benefit, that interest is a good thing.
    3. They don’t go away. For 30 years you are on the hook for that payment.
    4. Owning a house, not the mortgage, requires you to pay a ton in taxes, fees, repairs, etc. It’s expensive.
  4. Why paying it off is a good idea.
    1. Back to Mike’s original challenge. He thinks it’s a good financial move in many cases. The argument against is that you can “make more in the market.” If you have $200,000 lying around, perhaps you could invest and make 10% vs. your 4% mortgage. You can also lose 10% or 50%. Or maybe you have $200 more a month. Could you practically invest that monthly amount and do better?
    2. But it’s not just about what you could do in the market. It’s about diversifying your portfolio. Having money in the market, at different levels of risk and then having some in real estate is diversification.
    3. The math: risk free, guaranteed savings of the interest rate.
  5. Why paying it off is a bad idea.
    1. You are over-indexed in real estate.
    2. But most people who get to the point where they can pay off a mortgage will have a reasonable amount of their net worth in the market.

Our top 3 takeaways for this episode:

  1. Diversify your portfolio by paying off your mortgage
  2. Lower your fixed expenses and make it easier if you lose your job or want to be FI
  3. Houses are lifestyle choices, not investments, so always look to lower your costs 

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Show References

Mortgage Payoff Calculator on Etsy for $3

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Other Links

Maggie’s Blog: Mostly Minimal Life

Mike’s Book: Your New Relationship with Money

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